Most reliable way to double a portfolio in 12 years

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Most reliable way to double a portfolio in 12 years

Post by TheTimeLord »

If you wanted to double the size of a portfolio in 12 years how would you invest the money. If it goes over that's fine but not necesssary. The goal is to fine the most likely and least risky investment option to achieve this goal.
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Re: Most realiable way to double a portfolio in 12 years

Post by linuxizer »

Need a little under 6% annual return, assuming no volatility drag. That's much easier in nominal terms than real ones.

So do you want to double in nominal terms or double your purchasing power?
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Re: Most realiable way to double a portfolio in 12 years

Post by Johm221122 »

Save as much of your income as possible.How much of the amount you need comes from savings? As far as your percentage of portfolio in stocks, nobody can tell you because we don't know

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Re: Most realiable way to double a portfolio in 12 years

Post by livesoft »

StarbuxInvestor wrote:If you wanted to double the size of a portfolio in 12 years how would you invest the money. If it goes over that's fine but not necesssary. The goal is to fine the most likely and least risky investment option to achieve this goal.
The most reliable way is to simply add an equal amount of money to the portfolio. Get the money from elsewhere: a job, a spouse, an inheritance, etc.
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Re: Most realiable way to double a portfolio in 12 years

Post by TheTimeLord »

Johm221122 wrote:Save as much of your income as possible.How much of the amount you need comes from savings? As far as your percentage of portfolio in stocks, nobody can tell you because we don't know

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Re: Most realiable way to double a portfolio in 12 years

Post by Johm221122 »

StarbuxInvestor wrote:
Johm221122 wrote:Save as much of your income as possible.How much of the amount you need comes from savings? As far as your percentage of portfolio in stocks, nobody can tell you because we don't know

John
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Current bond yield won't help you much ,65%+ stocks and cut stock percentage aggressively if you get close would be my guess


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Re: Most realiable way to double a portfolio in 12 years

Post by BL »

Even though you didn't exactly ask, the quick "Rule of 72" will tell you the approximate interest rate you need (~6%). Divide 72 by 12.
(Also, to get years, divide 72 by rate.) This came in handier back in slide rule days, but it is still handy for quick mental arithmetic.

Where can you get a guaranteed rate of 6%? Use a time machine.
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Re: Most realiable way to double a portfolio in 12 years

Post by Grt2bOutdoors »

StarbuxInvestor wrote:
Johm221122 wrote:Save as much of your income as possible.How much of the amount you need comes from savings? As far as your percentage of portfolio in stocks, nobody can tell you because we don't know

John
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Re: Most realiable way to double a portfolio in 12 years

Post by richard »

Are you looking for real or nominal doubling?

12 year treasuries are yielding about 2.8% nominal, 0.5% real. Stocks could return 4% - 5% real based on CAPE and p/e. Just figure the combination that gets you to 6%, then note that "most reliable" is likely to mean "highly unreliable" in this context.
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Re: Most realiable way to double a portfolio in 12 years

Post by richard »

BL wrote:Even though you didn't exactly ask, the quick "Rule of 72" will tell you the approximate interest rate you need (~6%). Divide 72 by 12.
(Also, to get years, divide 72 by rate.) This came in handier back in slide rule days, but it is still handy for quick mental arithmetic.

Where can you get a guaranteed rate of 6%? Use a time machine.
A time machine is probably the most reliable way to achieve the goal.
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Re: Most realiable way to double a portfolio in 12 years

Post by LH »

StarbuxInvestor wrote:If you wanted to double the size of a portfolio in 12 years how would you invest the money. If it goes over that's fine but not necesssary. The goal is to fine the most likely and least risky investment option to achieve this goal.

70/30 stocks bonds


basically, stocks get 7 percent real return, 10 percent nominal. Bonds get around 3 percent real return 5 percent nominal(this is more hazy recollection)

http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html

Shows recent FRED data, look at bottom, for nominal returns of 10 year bills and stock. subtract inflation over the same period to get the real. Average inflation was 3.2 percent at one point, now recently, its been lower, so dunno what the updated annual inflation is.

But, 0.7(7)+0.3(3)=5.8 annual return of a 70/30 split

rule of 72
72/5.8 =12.4 year doubling time

So 70/30 would barely get you there expectantly in inflation adjusted terms, using 7 percent real stock return, and 3 percent real bond return.

If you want more expected chance of making it 80/20. But remember, this is AVERAGE expected return, not the actual path you would experience.
Last edited by LH on Mon Apr 28, 2014 8:12 am, edited 3 times in total.
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Re: Most realiable way to double a portfolio in 12 years

Post by ddb »

StarbuxInvestor wrote:If you wanted to double the size of a portfolio in 12 years how would you invest the money. If it goes over that's fine but not necesssary. The goal is to fine the most likely and least risky investment option to achieve this goal.
To double a portfolio size in 12 years on a nominal basis, without considering taxes, and assuming no deposits or withdrawals, will require a compound annual growth rate of 5.95%. Excel formula is [=(starting value / ending value)^(1/number of years)-1], or in this case, [=(2/1)^(1/12)-1]. Remember, this is a compound, or geometric, average rate of return. The simple, or arithmetic, rate of return will vary depending on the volatility of annual returns. The greater the volatility, the higher the arithmetic average return will need to be. E.g. earning exactly 5.95% per year has volatility (standard deviation) of zero, and arithmetic mean is equal to geometric mean. On the other hand, assume a scenario where you earn -10% in years 1, 3, and 5, and +24.72% in years 2, 4, and 6. Your geometric average return is 5.95%, and your arithmetic return is 7.36%. Still doubles your money, but has more volatility along the way.

Anyway, let's look at how to achieve that return. There is, to be blunt, no guaranteed or nearly-guaranteed way to earn 5.95% in today's interest rate environment. So a portfolio consisting entirely of CDs, fixed annuities, or other cash alternatives is not an option.

Bonds - investment grade bonds are also not going to earn you anywhere near 6% in today's environment. The "riskiest" such type of fund would be a long-term corporate bond fund. Using VCLT as a proxy (Vanguard Long-Term Corporate Bond ETF), you're only getting a yield of around 4.62%. And remember, even this is not guaranteed, as the price of the underlying bonds will be influenced both by changes in interest rates and credit quality. e.g. The index that this fund tracks, Barclays US Corporate 10+ Year Index, had a total return of -5.18% in 2008 (loss due to credit risk) and -5.69% in 2013 (loss due to interest rate risk).

On the bond front, you could also go with high-yield bonds or high-yield bond funds. You CAN find such investments that have current yields of 5.95% or more, but you're going to pay for this with much higher volatility. Still, this is the first option that at least gives you a CHANCE to meet your goal!

Stocks - stocks are so volatility that making a point estimate of future returns is kind of silly, but historically have generally averaged in the range of 8% to 12% nominal annual returns over long (20+ year) periods of time.

Bogleheads will generally preach a portfolio consisting of a diversified mix of stocks and investment-grade bonds. However, the driving force between your ability to double a portfolio is going to be how stocks perform, since targeting a rate of return of 5.95% annualized will almost necessarily require some amount of stock exposure. None of us here know how stocks will perform over the next 12 years, which means it is difficult to advise on such a specific goal.

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Re: Most realiable way to double a portfolio in 12 years

Post by JoMoney »

ddb wrote:... None of us here know how stocks will perform over the next 12 years, which means it is difficult to advise on such a specific goal.
:thumbsup

Interest rates just aren't available to suggest the goal is possible in a low-risk or predictable way. You can't pull a plant and make it grow.

How important it was to reach that goal within that time frame may make a difference in how much risk one was willing to take. If the goal isn't reached, is a portfolio that's 80% of the goal as much of a failure as losing the entire portfolio?
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Re: Most realiable way to double a portfolio in 12 years

Post by Phineas J. Whoopee »

A problem with stocks is their wild swings. The portfolio that was almost doubled at the end of year 11 might easily be down from the beginning even in nominal terms at the end of year 12.
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Re: Most realiable way to double a portfolio in 12 years

Post by nisiprius »

StarbuxInvestor wrote:If you wanted to double the size of a portfolio in 12 years how would you invest the money. If it goes over that's fine but not necesssary. The goal is to fine the most likely and least risky investment option to achieve this goal.
Part 1: Some math.

Taking your statement literally, you are asking how to double the number of dollars in the portfolio in 12 years.

According to the "rule of 72," the annual percentage gain that's needed to double a sum of money in X years is approximately 72/X, so you need to achieve an annual return of 72/12 = 6% per year.

More accurately, using Excel or a calculator, if 6% were the annual gain, that means your money would be multiplied by 1.06 every year, and after 12 years it would be 1.06 x 1.06 x 1.06 ... x 1.06 = 1.06 to the twelfth power, 1.06^12 in Excel = 2.012 times. I really think that's close enough, but to get the exact number you would take the twelfth ROOT of 2 (or raise 2 to the one-twelfth POWER), which is 1.0595, i.e. you need to multiply your money by 1.0595 every year meaning that you need to get an annual return of 5.95%. Hey, let's just say 6%.

Under current conditions, I'm quite sure that there's IS no safe or reliable way to be sure of doing this (other by jokes--"the safest way to double your money is to fold it in half"--or by adding to the the initial amount by saving, as others have pointed out).

But you are asking for the "most likely and least risky" way to achieve this goal by investment only, so I am going to give the straightest answer I can. But it's just a guess, and others will dispute it, and please do not take it as advice. It's just thinking out loud.

Part 2: Past behavior of securities.

Your goals of "most likely" and "least risky" are in conflict. More stocks makes success more likely--but not really all that likely. Yet, it increases risk because the shortfalls, although they happen less often, are worse.

Looking at a slightly out-of-date copy of the 2010 Ibbotson Classic Yearbook, I am just reading what it says, table and it says that in the past, from 1926 through 2009 inclusive, these portfolios of stocks (S&P 500 and predecessors) and "long term government bonds" had these geometric-mean returns:

30%/70%, 7.2%
10%/90%, 6.0%
0%/100%, 5.4%

Now I think it would be utterly insane to invest in 100% long-term government bonds for 12 years and expect 5.4% going forward, but then I sort of think all these numbers are optimistic going forward. But, they are what they are. We certainly are going to throw out 100% bonds.

In table 2.7 they show decade-by-decade returns for these portfolios, and they are as follows: for the 1920s, 30s, ... 2000's
30%/70%, 9.6, 4.8, 5.2, 5.6, 3.5, 5.9, 14.5, 11.7, 5.5.
10%/90%, 6.6, 5.0, 3.9, 1.78, 2.1, 5.7, 13.3, 9.8, 7.0.

So, big problem. 30/70 missed the target 6 times out of 9. 10/90 missed it 5 times out of nine.

Now I'm going to look at every row of that table and find how many times there were decades with returns below 6%.

100% stocks, 3/9 times shortfall
90/10, 3/9 times shortfall
70/30, 2/9 times shortfall
50/50, 3/9 times shortfall
30/70, 6/9 times shortfall
10/90, 5/9 times shortfall
0/100, 6/9 times shortfall

But before you jump to conclusions, you wanted both the most likely AND the least risky, and unfortunately--a point that people often seem to miss--those are not at all compatible. Because while 70/30 was the portfolio most likely to achieve 6%, when it missed, it missed by more. The worst return for 30/70 was 3.5%, which is bad, but the worst return for 70/30 was 2.1%, which is worse.

So the best conclusion I can come to is this.

1) For the goal of doubling your money in 12 years, the most likely investment is a balanced fund of stocks and bonds, somewhere in the very broad general ballpark of 50/50. In the Vanguard lineup: Balanced index, or Wellington, or Wellesley.

2) "Most likely" does not mean "likely." You'd better not be counting on it. There's a 1/3 to 1/2 a chance you won't get it.

3) The goals of "most likely" and "least risk" are in conflict. Up to a point, more stocks means more likely, but it also means more risk because when they occur the shortfalls are worse.

4) Many people I think of as experts seem pretty sure that the outlook for both stocks and bonds is worse than in the past, so your chances of hitting 6% may be even less than they were historically and the shortfalls when you miss may be worse.

5) Best chance of doubling your number of dollars is if we get high inflation during that time period!

6) It is very controversial whether, and to what extent stocks become less risky with longer holding periods. However, if you look at what is actually being said by the cheerleaders who preach that stocks are not that risky in "the long run," you will find that 12 years is still a high-risk period, and that the alleged period over which risk becomes lower is more like 30 years.
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Re: Most realiable way to double a portfolio in 12 years

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Sounds like the most likely, least risky way is to go 100% short or intemediate term bonds until the next Bear market then go 100% stocks. :D
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Re: Most realiable way to double a portfolio in 12 years

Post by tfb »

StarbuxInvestor wrote:Sounds like the most likely, least risky way is to go 100% short or intemediate term bonds until the next Bear market then go 100% stocks. :D
Or the opposite. 100% stocks until the balance reaches a point where 100% CDs or Treasuries to the end of 12 years will make the goal.
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Re: Most realiable way to double a portfolio in 12 years

Post by Imperabo »

Seems like people are having a hard time letting go of the idea that all portfolios require bonds, even for an intellectual exercise.

The 10 year is currently at 2.7%. Let's be generous and assume you can assemble a bond plan with an expected return of 3% nominal over your time period. If you go 50/50 stocks and bonds then your stocks would have to return 9%. If you go 100% stock then they would only have to return 6%. Any stock allocation less than 100% increases what your stocks must return above 6%. Therefore, your answer is 100% stocks (or more). If interest rates unexpectedly shoot up during your period or stocks go up to the point where you are close to your goal then you can reevaluate along the way. But trying to market time hoping for a drop in stocks before you get in seems like it would decrease your odds, especially when 6% stock return already has a good shot.
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Re: Most realiable way to double a portfolio in 12 years

Post by Johm221122 »

If this portfolio goal is retirement, Rember it may have to last 30 years or more.what AA are you going to use then? Withdraw rate? Not so much looking for answer but food for thought :beer

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Re: Most realiable way to double a portfolio in 12 years

Post by TheTimeLord »

I have learned a lot in this thread, I mean a whole lot. Most of it about people's appoaches to investing.
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Re: Most realiable way to double a portfolio in 12 years

Post by White Coat Investor »

It's very hard to answer your question, because there is nothing out there with a guaranteed 6% return over 12 years, like a 6% 12 year CD. So you will have to weigh the possibility of underperforming a little (not taking enough risk) vs the possibility of overperforming or underperforming dramatically (by taking on too much risk.) If the goal is AT LEAST 6% a year and the consequences of losing half your money aren't too bad, then risky investments like real estate, stocks, and high-risk fixed income (junk bonds, Peer to Peer Loans, Hard money lending etc) are going to be your best options. If the consequences of not quite getting 6% aren't too bad, but losing half your money would be unthinkable, then perhaps a relatively conservative balanced fund would be appropriate.

If you just can't decide, one of my favorite "default investments" is the Vanguard Life Strategy Moderate Fund.
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Re: Most realiable way to double a portfolio in 12 years

Post by TheTimeLord »

EmergDoc wrote:It's very hard to answer your question, because there is nothing out there with a guaranteed 6% return over 12 years, like a 6% 12 year CD. So you will have to weigh the possibility of underperforming a little (not taking enough risk) vs the possibility of overperforming or underperforming dramatically (by taking on too much risk.) If the goal is AT LEAST 6% a year and the consequences of losing half your money aren't too bad, then risky investments like real estate, stocks, and high-risk fixed income (junk bonds, Peer to Peer Loans, Hard money lending etc) are going to be your best options. If the consequences of not quite getting 6% aren't too bad, but losing half your money would be unthinkable, then perhaps a relatively conservative balanced fund would be appropriate.

If you just can't decide, one of my favorite "default investments" is the Vanguard Life Strategy Moderate Fund.
I understand there is no guarantee, I was trying to communicate risk adversion was more important in this case than upside potential.
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Re: Most realiable way to double a portfolio in 12 years

Post by gwrvmd »

If you want to guarantee your portfolio will double in 12 years your most prudent action would be to fold it in half :beer ...Gordon
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Re: Most realiable way to double a portfolio in 12 years

Post by jimb_fromATL »

I see that some folks have already addressed the rule of 72 and the actual math.

It does depend on what you mean by 'portfolio'. The rule of 72 is a good way to estimate the number of years for a lump sum to double in value. Just divide 72 by the interest rate. For example, at 6% earnings, 72/6 = approximately 12 years. And actually as someone showed, with interest compounded yearly, at 6% it would be about 11.9 years. Or the lump sum would only require an average APY of 5.95% to double in exactly 12 years.

However, most folks invest a little bit every month or so instead of just one big lump sum and never anything else. Each periodic contribution earning 6% would have to be there 12 years before it doubled. But the average time for all of the money being in the account is only 6 years. Or you could say that the average amount contributed is only half as much as the total. Either way you look at it, you need a lot more than 6% to double the incremental contributions by the end of 12 years.

For example, if you invested $1,000 for 12 years earning 6% APY compounded yearly, it would be worth $2,012.

If you invest $100 per month for 12 years that would be 100 x 144 = $14,400. Earning an average APY of 6% it will grow to $21,120. But that's only 1.47 times as much as your total contributions. To end up with double as much as you contributed monthly, your portfolio would need to earn an average APY of 10.456%.

Fortumately, there are math functions in spreadsheets and software packages and online calculators that do the tedious repetitious calculations for you.

=FV(6.%/12, 144, -100,0,1) … shows us that $100 per month earning an average of 6% compounded monthly for 12 years will grow to $21,120, not the 28,800 that would be double your contributions.

=RATE(144, 100, 0, -28800,1) *12 … shows that investing a total of $14,400 at $100 per month will have to earn an average APY of 10.456% to give you $28,800 after 12 years.

As a doublecheck, =FV(10.456%/12, 144, -100,0,1) … gives us $28,800.

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Re: Most realiable way to double a portfolio in 12 years

Post by twindad57 »

Interesting discussion. I really like nisiprius' discussion of probability. There is, of course, no way to guaranty a doubling in 12 years or any time period for that matter. However, the idea of assigning a probability of that outcome based on the expected return of various asset allocations can help you determine the likelihood and the risk you want to take.

You might also think about what you would do if your goal of doubling is not reached in 12 years. Would you work another year or two? What would that do to your expected returns? Could you adjust what you need from the portfolio if you fell short by 10%? 25%? At what level of 'miss' do you need to do something different?

Assume your current portfolio is worth $1,000,000. You need about 6% average nominal return to achieve your stated goal. If you miss that level of return here's some possible outcomes:

Act Avg Return | Approx Value of Portfolio | % of Desired Return Achieved
5.4% -- 1.9m -- 90%
4.5% -- 1.7m -- 75%
3.6% -- 1.5m -- 60%

I hope others will correct my math if I am wrong. I arrived at these by taking your desired return of 6% and multiplying it by 90%, 75% and 60% respectively. Here's the Excel formula using the first one as an example: =(1.054)^12 The calculation results in 1.8796 which I then multiplied by $1,000,000 to arrive at an approximate value of $1.9m.

You could've gotten the same numbers by just multiplying your current portfolio by some % less than 1 (1,000,000 * 75% = $1.75m), but I am trying to get you to look at what x% of a given return looks like. I think this can help assess whether expectations are reasonable for a given asset allocation.
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Re: Most realiable way to double a portfolio in 12 years

Post by nisiprius »

StarbuxInvestor wrote:...I understand there is no guarantee, I was trying to communicate risk aversion was more important in this case than upside potential...
The problem is that

it really doesn't look if you can get close to what you want.

What kind of balloon will get you closest to reaching the moon?

The problem is that bonds are relatively predictable and cater to your risk aversion BUT the historical average for intermediate-term bonds is only 5.3%, and I think it is all but certain to be less than that over the next 12 years. Just taking a totally wild guess, let's say that maybe Total Bond will average 4% over the next 12 years. (Some will say that's wildly optimistic). If so, since bonds are fairly predictable you can get the high likelihood you want--but likelihood of what?

If your goal is 3% you get a high likelihood of meeting it, but if your goal is 6% you get a high likelihood--of missing it.

Stocks give you a decent shot at getting that 6%, but that's all it is. A decent shot. Neither high likelihood nor low likelihood. If you're lucky you could not only meet your goal but blow right past it, 100% stocks earned over 18%/year average over four of the nine decades tabulated in the book I looked at. But if you're unlucky you could miss it by a mile--100% stocks actually lost money over two of those nine decades.

Here's another way to look at it. Wellington has existed since 1929, it's a 60/40 balanced fund, and it has earned an average (CAGR, geometric mean) 8.31% per year since inception, well over your target 6%. It's probably as good a choice as any. BUT...

...on a semilog chart, equal distances represent equal growth factors, and I've drawn a pair of arrows showing 12 years' time and 2x growth. If you look at the chart by eyeball, you can see that there are many places where it failed to double in 12 years. The chart's a little misleading, I've emphasized the failures; if you can imagine sliding the little two-arrow gadget along the curve you can see that it would have succeeded much more often than it failed. Nevertheless, in the past, there were many times when Wellington would have failed to double your money in 12 years.

Wellington might or might not be the best of all possible funds, and might not be the perfect compromise between your conflicting goals... and past performance is no guarantee of future results... but I think it's a fair example. I'm not recommending Wellington, I just used it because I can find a long-term chart for it.

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Re: Most reliable way to double a portfolio in 12 years

Post by Mountain Man »

I'll play: 34% Apple stock, 33% Berkshire Hathaway stock and 33% US Long Term Treasuries.
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Re: Most realiable way to double a portfolio in 12 years

Post by richard »

nisiprius wrote:<snip>What kind of balloon will get you closest to reaching the moon?
That's a good image of the problem with the question.
nisiprius wrote:The problem is that bonds are relatively predictable and cater to your risk aversion BUT the historical average for intermediate-term bonds is only 5.3%, and I think it is all but certain to be less than that over the next 12 years. Just taking a totally wild guess, let's say that maybe Total Bond will average 4% over the next 12 years. (Some will say that's wildly optimistic). If so, since bonds are fairly predictable you can get the high likelihood you want--but likelihood of what?
The best guess on bonds is the current yield (YTM), which is 2.2% for Total Bond Market. Perhaps yields will move to the long term average, but then you have to make up for the initial loss of principal. Duration is 5.6 years, which is a sizeable chunk of 12 years.
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Re: Most reliable way to double a portfolio in 12 years

Post by House Blend »

I agree with dismissing corporate bond *funds* for this thought experiment, but with a fixed deadline for doubling your money, I would not dismiss the possibility of a single 12 year corporate bond (or a small number of same) held to term.

The size and nature of the principal was left unspecified, so we'll assume it is, say $1M, sitting inside an IRA. (No tax issues to complicate the matter.)

Are there 12 year corporate bonds out there paying 6%?

What are their ratings?

This might be the least risky way to double your money in 12 years, if you are grading pass/fail. (In other words, you win if you double your money (or more) at the end of 12 years, and you lose if you only manage a 99% return.)
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Re: Most reliable way to double a portfolio in 12 years

Post by Phineas J. Whoopee »

House Blend wrote:...
Are there 12 year corporate bonds out there paying 6%?

What are their ratings?

This might be the least risky way to double your money in 12 years, if you are grading pass/fail. (In other words, you win if you double your money (or more) at the end of 12 years, and you lose if you only manage a 99% return.)
Yahoo's screener makes short work of that question, except 12 years isn't an option. 10 and 15 years are, so I choose 15 and specified YTM of at least 6% and non-callable.

It shows two: one from Donnelley and Sons, rated BB, with a YTM of 6.742%; and the other Citi, rated A, with a 10.263% YTM.

Repeating the search for a ten-year term shows one: Frontier Communications Corp, rated BB, YTM 6.862%.

Citi's is investment grade, so if constrained by that and nothing else it would be the best choice among the ones Yahoo's screener found, although I personally would want to work out why the higher-rated bond also has a higher YTM. Using a more sophisticated tool would probably narrow things down, but that's left as an exercise for the OP.

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Re: Most realiable way to double a portfolio in 12 years

Post by goblue100 »

For the purposes of this discussion, I am going to assume you are limiting responses to stocks and bonds? My answer would be to start with something like a 60 / 40 split (stocks / Bonds), using something like the 3 fund portfolio. The 60 % allocation to stocks is higher than it probably needs to be based on a 6% needed yearly return, but I would rather take more risk early so that I can hopefully take much less risk as I get closer to the end of the goal. Rebalance as needed, within a 5% band. Reduce equity exposure as you get closer to the goal. If at some point a CD like rate of return is all that is required move to CDs.

Also, I noticed I have the same tag as the OP. Not intentional, I promise. Great minds think alike.
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Re: Most reliable way to double a portfolio in 12 years

Post by Imperabo »

Starbux,

What definition of risk are you using? The only success criterion you set was to "reliably" double in 12 years, therefore the only risk definition I can gather is failure to achieve that goal. Ergo, 100% stocks.
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Re: Most realiable way to double a portfolio in 12 years

Post by TheTimeLord »

twindad57 wrote: Act Avg Return | Approx Value of Portfolio | % of Desired Return Achieved
5.4% -- 1.9m -- 90%
4.5% -- 1.7m -- 75%
3.6% -- 1.5m -- 60%
Thanks, this is very helpful.
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Re: Most realiable way to double a portfolio in 12 years

Post by Kevin M »

richard wrote: The best guess on bonds is the current yield (YTM), which is 2.2% for Total Bond Market. Perhaps yields will move to the long term average, but then you have to make up for the initial loss of principal. Duration is 5.6 years, which is a sizeable chunk of 12 years.
Even if yields move to long-term averages I don't think you'll get close. Just using rough rules of thumb with some rounding (appropriate since this is rough)...

The point of indifference model of duration tells us that over the next 6 years you'll earn about 2% in a bond fund like TBM no matter what happens to interest rates tomorrow. This means you'd need to earn about 10% during the last six years to average 6% ( (2% + 10%)/2 = 6%). Let's check this: 1.02^6 * 1.10^6 = 1.995, so pretty close to the doubling goal. This implies that TBM yield would need to increase to 10% tomorrow (or very soon) to meet the goal. A rate increase from 2% to 10% at the six-year mark won't do it, since the duration guideline tells us that you'd earn about 2% in the second six years as well (as you recover from the capital loss that occurs when the rate increases). So I think the best-case scenario is a huge rate increase in the near future. Highly unlikely.

Yield on a 10-year treasury is about 2.7%, and it looks like you can earn about 3.3% on a new-issue brokered CD. So in nominal terms that's your risk-free rate for a 10-year period. The real 10-year treasury rate is about 0.5%, so probably prudent to knock about 2% off of nominal terms if you are interested in purchasing power.

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Re: Most reliable way to double a portfolio in 12 years

Post by Jack FFR1846 »

I invested $100k in Doc Brown Enterprises in 1955. I know it pans out because I was born in 1957.



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Re: Most reliable way to double a portfolio in 12 years

Post by Kevin M »

StarbuxInvestor wrote:If you wanted to double the size of a portfolio in 12 years how would you invest the money. If it goes over that's fine but not necesssary. The goal is to fine the most likely and least risky investment option to achieve this goal.
I don't think you're asking quite the right question.

As has been pointed out, the goal and the risk aversion are in conflict, since in general, higher expected returns come with greater risk. In the current environment, a 6% return, required to meet the goal, is a high expected return, even in nominal terms, and quite high in real terms.

As has been shown, the risk-free nominal rate for a 10-year period is between 2.7% and 3.3%, and in real terms it's closer to 0.5%. So by definition, to earn a nominal 6% you must take some risk. Risk by definition means that you may not reach the goal (or you may exceed it). Therefore, to increase the probability of meeting the goal, you must increase the uncertainty of your return. This is one of the most fundamental tradeoffs in investing.

One investing concept contained within your question is the efficiency of the risk/return tradeoff, often measured as Sharpe Ratio, which basically is a ratio of the expected return to the expected uncertainty of the return. Larry Swedroe often uses Sharpe Ratio when analyzing investments, so you can read some of his articles to get his viewpoints on which portfolios are more efficient. I take much of that with a big grain of salt, since all such analyses are based on certain time periods, and the results can vary greatly during different time periods.

I think the better questions to ask are what is your goal, and what is your ability, willingness, and need to take risk. You may need to adjust the goal based on the answers to the risk questions. If you have high ability, willingness and need to take risk, then perhaps 100% in a global stock index portfolio is a good answer. If your any of the risk components is too low to justify the risk of 100% stocks, then you may need to adjust the goal.

One guideline Larry offers is the maximum percentage that should be in stocks given your investment horizon; this is part of the ability to take risk test. In one of his books, he shows 80% max stocks for 11-14 years, 70% for 10 years, 20% for five years, and 0% for 0-3 years. This indicates that you might start with 80% stocks, but dial it down each year until you end up in cash, short-term bonds, or CDs for the last three years.

To help with evalutating need to take risk, he offers a table that shows that for a 6% return, a 60% stock allocation might be appropriate. However, interest rates and expected returns were much higher when that book was written, so I suspect the equity allocation would be higher now (he showed 9% expected return for 100% stocks).

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Re: Most realiable way to double a portfolio in 12 years

Post by richard »

Kevin M wrote:
richard wrote: The best guess on bonds is the current yield (YTM), which is 2.2% for Total Bond Market. Perhaps yields will move to the long term average, but then you have to make up for the initial loss of principal. Duration is 5.6 years, which is a sizeable chunk of 12 years.
Even if yields move to long-term averages I don't think you'll get close. Just using rough rules of thumb with some rounding (appropriate since this is rough)...
Agreed. See my earlier time machine comment.
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Re: Most reliable way to double a portfolio in 12 years

Post by House Blend »

Phineas J. Whoopee wrote:
House Blend wrote:...
Are there 12 year corporate bonds out there paying 6%?

What are their ratings?

This might be the least risky way to double your money in 12 years, if you are grading pass/fail. (In other words, you win if you double your money (or more) at the end of 12 years, and you lose if you only manage a 99% return.)
Yahoo's screener makes short work of that question, except 12 years isn't an option. 10 and 15 years are, so I choose 15 and specified YTM of at least 6% and non-callable.

It shows two: one from Donnelley and Sons, rated BB, with a YTM of 6.742%; and the other Citi, rated A, with a 10.263% YTM.

Repeating the search for a ten-year term shows one: Frontier Communications Corp, rated BB, YTM 6.862%.

Citi's is investment grade, so if constrained by that and nothing else it would be the best choice among the ones Yahoo's screener found, although I personally would want to work out why the higher-rated bond also has a higher YTM. Using a more sophisticated tool would probably narrow things down, but that's left as an exercise for the OP.
I realize now that this is not as tidy a solution as I had first thought. The problem is that the interest payments need to be invested as well, otherwise, you aren't getting the compounding necessary for 6% @ 12 years to produce money-doubling.

So in addition to the default risk, you are still at the mercy of whatever the market has to offer at the times you receive your interest payments. You could use CDs or treasuries with appropriate term lengths as buckets for collecting these payments, but your 12 year bond would need to be paying an even higher
rate to compensate.

As a bond fund investor, it is easy to forget that the convenience of reinvestment is not in play for individual bonds...
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Re: Most reliable way to double a portfolio in 12 years

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This thread is now in the Investing - Theory, News & General forum (general investing, theory question).
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Re: Most reliable way to double a portfolio in 12 years

Post by nisiprius »

House Blend wrote:
Phineas J. Whoopee wrote:
House Blend wrote:...Are there 12 year corporate bonds out there paying 6%? What are their ratings?...
Yahoo's screener makes short work of that question, except 12 years isn't an option. 10 and 15 years are, so I choose 15 and specified YTM of at least 6% and non-callable. It shows two: one from Donnelley and Sons, rated BB, with a YTM of 6.742%; and the other Citi, rated A, with a 10.263% YTM. Repeating the search for a ten-year term shows one: Frontier Communications Corp, rated BB, YTM 6.862%...
I realize now that this is not as tidy a solution as I had first thought. The problem is that the interest payments need to be invested as well... As a bond fund investor, it is easy to forget that the convenience of reinvestment is not in play for individual bonds...
I'm still sort of scratching my head about that A-rated bond with a 10% yield. I'm too lazy to dig into it but my knee-jerk reaction is "too good to be true."

Even without reinvestment, let's see... well, hey, I don't even have to open Excel. if you have a bond and it pays 10% interest per year and you take the interest and put it under the mattress, then over ten years you have received 100% of your original investment in interest. At 15 years, you have gotten 150% of your investment in interest and you get the original bond principal back... hmmm... wait... how much is that? Well, even if it were only HALF of what you paid for the bond... you'd still have doubled your money.
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Re: Most reliable way to double a portfolio in 12 years

Post by happytrades »

How about a SPIA?

Depending on your age, you could buy a Single Premium Immediate Annuity, and be guaranteed to double your money in 12 years -- assuming you don't die in the interim.
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Re: Most reliable way to double a portfolio in 12 years

Post by Gecko10x »

I don't think anyone has suggested this yet:

Take something with an expected return >6% (small value?), and use a value averaging approach. example
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Re: Most reliable way to double a portfolio in 12 years

Post by LH »

happytrades wrote:How about a SPIA?

Depending on your age, you could buy a Single Premium Immediate Annuity, and be guaranteed to double your money in 12 years -- assuming you don't die in the interim.
nice.
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Re: Most reliable way to double a portfolio in 12 years

Post by garlandwhizzer »

There is no reliable way to produce a guaranteed 6% annualized return over the next 12 years, period. If such a thing existed we would all be in it. So we're not talking about reliability and guarantee here, we're talking about probability and risk. The probability that any type of bonds will return anywhere near 6% over the next 12 years is zero. The likely return over 12 years on high quality bonds is somewhere around where the 10 year Treasury is priced now, 2.7%. So all bond dominated "safe" portfolios are doomed to fail this goal, unless you're holding bonds only for the sole reason of shifting them into stocks in a severe market decline, a tricky market timing feat that is high risk/high reward.

The best estimates of future US equity returns from current richly valued levels top out at about 5% - 7% nominal annually, although these estimates are not reliable enough to be counted on. The only way to get to a 6% return for 12 years seems to be through a stock dominated portfolio, at least 70% - 80% equity, perhaps more, but that involves substantial risk and volatility and still is not guaranteed to work. In short to achieve that 6% goal you not only have to be very risk averse and have an iron stomach during market declines, you also have to have luck on your side.

I think it's a better approach not to set up hard numbers as your goal, but to get a good asset allocation model and strategy and keep to it. We have to accept up front that the future over 5 or 10 or even 20 years is unknown and unknowable, but keep the faith that if you hang in there with a well thought out plan for the long run, however long that is, you're going to do just fine.

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Re: Most reliable way to double a portfolio in 12 years

Post by nisiprius »

garlandwhizzer wrote:....There is no reliable way to produce a guaranteed 6% annualized return over the next 12 years, period. If such a thing existed we would all be in it....
I agree with you, but what about the A-rated bond with a 10% yield that Phineas J. Whoopee says popped up when he ran a Yahoo! screen? "one from Donnelley and Sons, rated BB, with a YTM of 6.742%; and the other Citi, rated A, with a 10.263% YTM."
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Re: Most reliable way to double a portfolio in 12 years

Post by packer16 »

Buy some NNN lease REITs. The cash flows from these are more like bonds because the average remaining lease duration is 10+ years but they are priced as stocks. There are two public REITs (ARCP and LXP) which are yielding 7.5% and 6.1% respectively and have growing rental streams by inflators approximating the CPI. There is a private NNN company which provide quarterly liquidity and the buy-back price increases as the distributions increase which would be better if the tail-end of the period has a stock market swoon.

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Re: Most reliable way to double a portfolio in 12 years

Post by bobbun »

Build a relatively conservative portfolio of stocks and treasuries (heavy on the treasuries), and leverage it slightly using derivatives (I'm thinking futures if the portfolio is large, options if it's small).
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Re: Most reliable way to double a portfolio in 12 years

Post by dl7848 »

nisiprius wrote:
garlandwhizzer wrote:....There is no reliable way to produce a guaranteed 6% annualized return over the next 12 years, period. If such a thing existed we would all be in it....
I agree with you, but what about the A-rated bond with a 10% yield that Phineas J. Whoopee says popped up when he ran a Yahoo! screen? "one from Donnelley and Sons, rated BB, with a YTM of 6.742%; and the other Citi, rated A, with a 10.263% YTM."
I'd bet the Citi one was callable.
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Re: Most reliable way to double a portfolio in 12 years

Post by surfstar »

Put it all on black. Double your money, invest in TIPS for the remaining 12 years.
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